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RETAIL CRE - More Disappointing Results

On Monday afternoon, Urban Outfitters reported that sales at its namesake store plunged 12% during the first quarter. "While Anthropologie and Free People continue to deliver record levels in sales and profits, Urban Outfitters had a disappointing quarter and is working diligently to regain its fashion footing," said CEO Richard Hayne. URBN fell 8.8%.

Dick's Sporting Goods announced weaker-than-expected quarterly sales and earnings. "Our difficulties this quarter were isolated to two categories: golf and hunting," said CEO Edward Stack. "After a very challenging first quarter in golf last year, we expected some further headwinds and only modest improvement, but instead we saw a continued significant decline. In the case of hunting, we planned the business down based on last year's catalysts, but it was even weaker than expected." DKS plunged 17.9%.

The TJX Companies, which owns T.J. Maxx and Marshalls, also announced weak financial results. "For the first quarter, our consolidated comparable store sales increased 1%, and our earnings per share of $.64 were slightly below our expectations with a negative impact from foreign currency exchange rates that was larger than our guidance assumed," said CEO Carol Meyrowitz. "While sales were not as strong as we would have liked, predominantly in our apparel business, I was very pleased that overall business trends improved as the quarter progressed." TJX fell 7.6%

Caterpillar disclosed that its rolling 3-month sales through April tumbled 13%. Latin America; Asia/Pacific; and Europe, Africa and Middle East (EAME) also saw sharp declines during the period. Caterpillar is recognized as a bellwether of economic activity. CAT declined 3.6%

The company plans to open specialty stores for women in its existing retail locations.

"Think a colorful wall of sports bras, vibrant tables filled with color coded tees/tanks, and racks organized by specific needs, like running jackets and yoga pants," the company told Business Insider in an email. "Accessories will also have a designated space, so women can match everything from their socks, to their gym bags, to their headbands."

The expanded product offerings will also be online.

With the advent of brands like Lululemon, Gap's Athleta, and Under Armour, demand for women's athletic apparel is soaring like never before.

But the brand faces a ton of competition from retailers who have already established themselves with female clientele.

The mounting competition has even begun to threaten Lululemon, long seen as the paramount purveyor of fitness clothing for women.

In an earnings conference call with analysts, Dick's CEO Ed Stack said that the women's business has the most growth potential of any segment. He also cited youth and footwear as growth opportunities.

The company also has the advantage of partnerships with mega-brands like Adidas, Nike, and Under Armour.

Dick's Sporting Goods (DKS), one of the nation's largest golf retailers, this morning reported earnings and sales that disappointed, citing notable weakness in its golf and hunting segments.

Dick's shares are off more than 15% following its report. Shares of golf-club maker Callaway Golf (ELY) are also down about 4% following the report from Dick's.

Dick's CEO Edward Stack said the company expected a modest improvement in its golf segment during the first quarter, but instead saw declines. Same-store sales at its Golf Galaxy stores fell 10.4% during the quarter. In the prior year period, same-store sales at Golf Galaxy fell 11.8%.

"Our difficulties this quarter were isolated to two categories: golf and hunting. After a very challenging first quarter in golf last year, we expected some further headwinds and only modest improvement, but instead we saw a continued significant decline. In the case of hunting, we planned the business down based on last year's catalysts, but it was even weaker than expected," Stack said.

Five years into the recovery, the debate rumbles on about whether growth will take off, or if the U.S. is in a new normal of secular stagnation.

Having previously focused on:

The Great Recession,

The housing recovery, and

Fiscal Reform,

the economic policy debates in the U.S. have recently turned towards the question of whether longer-term trends are preventing a return to previous growth rates.

EIGHT YEARS

Recent work by H arvard University professors Carmen Reinhart and Kenneth Rogoff has extended the analysis on the after-effects of financial crises. According to their research into 100 different financial crises, the average time it takes for an economy to recover from a systemic banking crisis and re-attain its previous level of income is eight years.

Depending on how one weights the depth of the most recent crisis and the various components of the U.S. policy response over time – sustained monetary stimulus, financial restructuring, initial fiscal stimulus, and subsequent fiscal austerity through sequestration – the U.S. economy might be expected to hit that eight-year average or perhaps do a bit better. Indeed, Reinhart and Rogoff claim that as measured by per capita GDP, the U.S. and Germany are the only two of 12 economies to have completed this cycle already.

Still, measures such as rate of GDP growth and U.S. employment continue to disappoint, and broader hopes for a speedy and full U.S. recovery to growth above 3 percent have been repeatedly dashed. The intervening external shocks from Europe (the sovereign debt crisis) and Japan (the Fukushima disaster) have no doubt contributed, but another culprit seems to be the continued travails of the U.S. housing market, which has conspicuously underperformed once again this year.

SECULAR STAGNATION

Economists such as former Treasury Secretary Lawrence Summers have raised the more alarming prospect of a deeper issue: secular stagnation. In a speech at the IMF last November, he noted that given the depth of the recession and the rapid recovery in financial conditions, the U.S. economy should have rebounded more sharply than normal after the crisis. His comments suggest that the downward shift in growth is not a recent phenomenon, but rather the result of longer-term trends. He focuses on figures dating back to the 1980s, but there is also evidence that over the last 70 years, the rate of GDP and total job growth has tended to decline in successive business cycles, as the time-series chart shows.

The trend appears even grimmer when expressed as an average per-quarter GDP growth rate: the averages for GDP and jobs have declined by factors of 4 and 7, respectively, since World War II. As has been widely discussed, the two most recent recoveries have been marred by disproportionately weak job growth, which presents its own puzzles but has been attributed in part to innovations in technology and globalizing labor markets.

The recent problems in the labor market seem daunting indeed, and the U.S. is far from anything like a societal consensus, but the robust public debate about labor slack and education reform gives some grounds for hope, if not exactly optimism, in that area.

Another sign of secular stagnation is the remarkably smooth downward trend of the quarterly GDP growth average in successive recoveries. While the labor market’s ability to rebound has varied some over time, the decline in overall growth rates has been steady, coinciding with the maturing of the U.S. physical capital base and, later on, both the labor market challenges noted above and declines in population growth and labor force participation.

Summers went on the record last year advocating a variety of widely discussed reforms that target many of these issues, ranging from demand-side (infrastructure spending) to supply-side (education, tax reform, entitlement reform), but that doesn’t seem to have moved the political debate.

If the political establishment remains indifferent, the Fed is likely to keep policy rates low for a whole lot longer than the “some time” it has predicted so far.

05-21-14

INDICATORS

GROWTH

US ECONOMICS

MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - May 18th, 2014 - May 24th,2 014

SHANGHAI (AP) -- President Vladimir Putin met Tuesday with China's president in a diplomatic boost for the isolated Russian leader but the two sides had yet to agree on a widely anticipated multibillion-dollar natural gas sale.

Putin, shunned by the West over Ukraine, met with Chinese President Xi Jinping at a start of a two-day meeting on Asian security with leaders from Iran and Central Asia. The Russian leader is hoping to extend his country's dealings with Asia and diversify markets for its gas, which now goes mostly to Europe.

Russia has been negotiating for more than a decade on a proposed 30-year deal to supply gas to China. Officials said they hoped to complete work in time to sign a contract while Putin is in Shanghai. But Putin's spokesman, Dmitry Peskov, said Tuesday it wasn't finalized.

"Significant progress has been reached on gas, but there are issues that need to be finalized regarding the price," Peskov said, according to Russian news agencies. He said a contract could be signed "at any moment."

A deal would give Moscow an economic and political boost at a time of Western sanctions, while pressure on Moscow is thought to give Beijing leverage to push for a lower price.

The U.S. treasury secretary, Jacob Lew, appealed to China during a visit last week to avoid taking steps that might offset sanctions. However, American officials have acknowledged China's pressing need for energy.

In a joint statement, Putin and Xi urged Ukrainians to start "broad nationwide talks" on ending their country's crisis. Russia has been pressing for such talks and they are an element of a peace plan proposed by European mediators. The Ukrainian government has refused to invite separatist rebels in the country's east to participate.

The statement appealed for global rules to limit use of computer technology to hurt state sovereignty, a reference to efforts to curb the spread of online opposition to authoritarian governments. Beijing tries to block material that criticizes one-party rule, while Moscow has tightened controls. An official said last week Russia might block access to Twitter.

Putin and Xi attended the signing of 49 cooperation deals in fields including energy, transport and infrastructure, but no details were given at the ceremony.

The price of gas is the sticking point in the proposed agreement between Russia's government-controlled Gazprom and state-owned China National Petroleum Corp.

A deal looked more likely after Washington and the European Union imposed asset freezes and visa bans on dozens of Russian officials and several companies.

The deal to pipe Siberian gas to China's northeast would help Russia diversify export routes away from Europe. It would help to ease Chinese gas shortages and heavy reliance on coal.

Putin told Chinese reporters ahead of his visit that China-Russia cooperation had reached an all-time high.

"China is our reliable friend. To expand cooperation with China is undoubtedly Russia's diplomatic priority," Putin said, according to the official Xinhua News Agency.

Xi and Putin were scheduled to kick off a joint exercise between their two navies in the northern part of the East China Sea.

The two countries developed a strategic partnership after the 1991 Soviet collapse, including close political, economic and military ties in a shared aspiration to counter U.S. influence, especially in Central Asia.

A tentative agreement signed in March 2013 calls for Gazprom to deliver 38 billion cubic meters of gas per year beginning in 2018, with an option to increase that to 60 billion cubic meters.

Plans call for building a pipeline to link China's northeast to a line that carries gas from western Siberia to the Pacific port of Vladivostok.

A gas deal would mean China would be in a "de facto alliance with Russia," said Vasily Kashin, a China expert at the Center for Analysis of Strategies and Technologies in Moscow.

In exchange, Moscow might lift restrictions on Chinese investment in Russia and on exports of military technology, Kashin said in an email.

"In the more distant future, full military alliance cannot be excluded," Kashin said.

"It will, however, take years for China to start playing in the Russian economy a role comparable to that of the EU," he said. "After that happens, both China and Russia will be much less vulnerable to any potential Western pressure and that, of course, will affect the foreign policy of both these countries."

In a joint statement after their talks, Putin and Xi said the two sides voiced serious concerns over the political crisis in Ukraine, and urged Ukrainian regions, people and political groups to start "broad nationwide talks," according to Russian state news agency ITAR-Tass. Their statement also said that any external attempts to forcibly interfere in Syria would be unacceptable.

Slowly - but surely - the USD's hegemony is being chipped away whether by foreign policy faux pas, crossed red-lines, or economic fragility. However, on Day 1 of Vladimir Putin's trip to China it is clear that the two nations are as close as ever. VTB - among Russia's largest banks - has signed a deal with Bank of China to pay each other in domestic currencies, bypassing the need for US Dollars for "investment banking, inter-bank lending, trade finance and capital-markets transactions." Kirill Dmitriyev the head of Russia’s Direct Investment Fund notes, "together it’ll be possible to discuss investment in various projects much more efficiently and clearly," as Russia's pivot to Asia continues to gather steam.

VTB, Russia’s second biggest lender, has signed a deal with Bank of China, which includes an agreement to pay each other in domestic currencies.

“Under the agreement, the banks plan to develop their partnership in a number of areas, including cooperation on ruble and renminbi settlements, investment banking, inter-bank lending, trade finance and capital-markets transactions,” says the official VTB statement.

The deal underlines VTB Group’s growing interest in Asian markets and will help grow trade between Russia and China that are already close trading partners, said VTB Bank Management Board Vasily Titov.

But it's not just the banking relationships...

In the first day of a two-day trip to China Russia’s President Vladimir Putin said the two countries will be increasing their bilateral trade to reach a new level.

“Our countries have done a huge job to reach a new historic landmark…. China has firmly settled in a position of our key trade partner,” Putin said.

Putin also said that trade turnover between Russia and China grew almost 2 percent during 2013 to reach about $90 billion.

“If we sustain this pace the level of bilateral trade of $100 billion will be reached by 2015 and we’ll confidently move on,” Putin said.

Increasing investment cooperation is crucial, Putin added.

...

“Together it’ll be possible to discuss investment in various projects much more efficiently and clearly,” as Interfax quotes Kirill Dmitriyev the head of Russia’s Direct Investment Fund.

Russian President Vladimir Putin told Chinese media that the strength of Russia-China relations is at an all-time high as the two countries are reportedly finalizing a 30-year gas-supply deal.

"Now Russia-China cooperation is advancing to a new stage of comprehensive partnership and strategic interaction," Putin said. "It would not be wrong to say that it has reached the highest level in all its centuries-long history."

The gas deal, which has been on the table for over 10 years, would send 38 billion cubic meters of natural gas to China each year starting in 2018 with the potential to expand the annual capacity to 61 billion cubic meters.

China consumed about 170 billion cubic meters of natural gas in 2013 and set a target of up to 420 billion cubic meters a year by 2020.

Europe is Russia’s largest energy importer as it bought more than 160 billion cubic meters of natural gas in 2013, but tensions and sanctions over Putin's meddling in Ukraine have Russia looking elsewhere.

Consequently, the deal is huge for the Kremlin since natural gas represents nearly 60% of Russia's total exports.

We have previously profiled the "holy grail" gas deal between Russia and China on several occasions, and noted last week how it is expected to be signed this week - pending some final price negotiations. It appears that was spot on as Reuters reports, Russian state-run Gazprom said it was still "one digit" away from finalising a 30-year gas supply deal with Beijing which is expected to crown Russian President Vladimir Putin's visit to China next week. On the heels of Russia's de-dollarization meetings, the coming week appears a crucial one for the history books of the US Dollar as reserve currency (or will China leverage Russia's need to diversify from Europe and stall the deal once again?)

As we have discussed in detail, Russia has been in talks with China to supply it with 38 billion cubic metres (bcm) of gas a year for more than a decade but the deal has been postponed repeatedly over price disagreements. And as Reuters reports, last week, state China National Petroleum Corp (CNPC) said that it and Gazprom had reached an agreement to sign a contract during Putin's visit but that the two sides had yet to iron out price differences.

Gazprom chief executive Alexei Miller confirmed in an interview on state Rossiya 24 television that the talks were in the final stage and only centred around base price.

"There is just one question - it's ... a starting, base price in the price formula which, it's remarkable, has already been fully agreed upon with our Chinese partners," Miller told news show Vesti on Saturday with Sergey Brilev.

"It's a very little more - to put in only one digit, and a 30-year contract to supply 38 bcm of gas from East Siberia to China will be signed," said Miller.

The question is - of course - will the price disagreements once again spoil the party...

With tensions high with the West over Russia's role in the Ukraine crisis, Moscow is eager to divert some oil and gas from European markets, part of its wider push to Asia.

...

About 80 percent of Gazprom's revenue comes from gas sales to Europe and analysts say that failure to clinch a deal with China, the world's top energy consumer, would expose its huge reliance on Western consumers and might strengthen Beijing's bargaining positions in the months to come.

Miller emphasized that the contract would be signed on mutually beneficial terms, adding that the sides had also agreed to start talks on a second route for Russian gas supplies to China after the current deal is signed.

As we noted previously, quid pro quo:

"Observers expect both leaders to take a united stand on major international issues, and Putin may seek China's support on Russia's dealings with Ukraine."

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